Dish Network (DISH) Misses on Both Top and Bottom Lines, But Gains Subscribers

Shares of satellite TV service provider Dish Network (DISH: Charts, News) slumped yesterday due to a drop in both top and bottom lines for its first quarter. The Englewood, Colorado-based company posted earnings of 80 cents per share, or $360.3 million, on revenue of $3.58 billion.

Earnings slid 34% but revenue rose 11% from the prior year's first quarter. Both missed the analysts' consensus estimates of 71 cents per share on revenue of $3.62 billion. Dish blamed the decreased earnings on a comparison to the $340.7 million gain it reported a year earlier from settling a patent lawsuit with rival TiVo (TIVO: Charts, News).

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However, Dish managed to add 104,000 subscribers during the first quarter, bringing its total customer base to 14.1 million. In the prior year quarter, Dish added 58,000 customers. This marks Dish's second consecutive quarter of subscriber growth, after the company lost 250,000 subscribers during the second half of 2011.

Although new customer growth has turned positive, analysts are concerned about Dish's ability to retain existing customers, who are increasingly attracted to wholly Internet-based alternatives, such Netflix (NFLX: Charts, News), Amazon (AMZN: Charts, News) Prime, Apple's (AAPL: Charts, News) Apple TV and Hulu. Existing customers slipped from 14.2 million a year earlier to 14.1 million, leading some to speculate that Direct TV is losing momentum in a shaky market. The company's cancellation rate, also known as its churn rate, declined from 1.47% to 1.35%.

To attract new subscribers and appease existing ones, Dish has frozen current prices through January 2013. Despite this tactic to maintain the status quo, the company has lost existing subscribers to rivals using aggressive promotional offers. This attributed to its operating margin nearly being sliced in half, dropping from 30.5% to 16%.

Dish Network has aggressively attempted to expand beyond satellite TV into broadband Internet access, streaming video and other services. Last year, Dish acquired bankrupt video rental giant Blockbuster Video, which it resurrected as a Blockbuster-branded streaming media service in October. Dish closed down 500 brick and mortar Blockbuster locations during the first quarter, with the intention of closing 100 more in the current quarter.

Dish has also spent nearly $3 billion on wireless spectrum investments, suggesting that the company is ready to offer streaming media on smartphones, tablets and other wireless Internet devices. Dish's attempt to control part of the wireless spectrum has yet to be approved by the Federal Communications Commission. ISI Group's analyst Vijay Jayant claims that Dish would be unlikely to build a costly network of towers, instead opting to partner with a wireless company or sell the spectrum. "The question of what Dish will ultimately do with its large trove of spectrum will be front and center of investor attention," Jayant stated.

Looking ahead, Dish faces unspecified "substantial damages" from its four-year old dispute with AMC Networks( AMCX: Charts, News), which could cause AMC to pull its hit shows "Mad Men" and "The Walking Dead" from Dish's lineup. AMC is seeking $2.5 billion in damages for Dish's improper termination of a 15-year contract with AMC's subsidiary VOOM HD.

Although Dish will survive a $2.5 billion charge, the loss of AMC's programming could impact Dish's subscriber base. In addition, newer technologies, such as Netflix and Hulu, threaten the company's core competencies. Dish's fear of these companies was apparent when it made a failed bid to acquire Hulu last year.

Shares of Dish are fundamentally undervalued, trading at 10.7 times forward earnings, but its 5-year PEG ratio of 5.8 suggests sluggish growth ahead.

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Published on May 8, 2012

By Leo Sun

Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.